How to protect your tax refund from student loan tax garnishment

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The government may withhold your federal tax refund if you have not repaid your federal student loans. Learn how to end student loan tax garnishment. (Shutterstock)

If you default on your federal obligations student loans, you may encounter financial problems when paying your taxes. Your loan holder can withhold some or all of your federal income tax refund to pay your student loan debt, also known as tax garnishment. Before filing your tax return, it is important to pay off your delinquent loans.

Here is some additional information on what student loan tax garnishment is, how it works, and how to stop student loan tax garnishment.

If you are considering refinancing your student loans to avoid defaults, visit Credible to learn more about student loan refinancing and to see your prequalified rates from private student lenders.

What is student loan tax garnishment?

If you have federal student loans in default, your loan holder can garnish your federal tax refund. This means that when you file your taxes, the federal government can take your refund and apply it to your federal student loan debt.

Private student lenders cannot garnish your tax refund. But if you breach your private loans, the lender can garnish your wages if they sue you and receive a judgment.

Under federal debt collection law, the Department of Education may instruct the U.S. Department of the Treasury to withhold money from your federal or state income tax refunds, as well as social security payments and other federal payments. This tax refund withholding is called treasury compensation.

Before a Treasury offset can begin, the Tax Services Office must send you a Notice of Intent to Offset letter 65 days before the scheduled offset date. Although you only receive one notice, the tax garnishment will continue until you are no longer in default or repay your federal student loan.

Tax refunds during COVID-19

To help provide relief during the COVID-19 pandemic, the federal government has suspended student loan payments and collections on defaulted federal student loans until August 31, 2022.

The government will also not withhold income tax refunds from eligible federal student loans in default. If you have these types of federal student loans in default, they are eligible for COVID-19 emergency assistance:

  • Direct loans
  • Federal Family Education Loan Program (FFEL) Loans
  • Federal Perkins loans held by the Department of Education
  • HEAL Loans

Treasury offsets will remain suspended for six months after the student loan payment suspension ends as part of ongoing COVID-19 financial relief efforts. This means that if your loans qualify, you will not have money withheld from your tax refund during this time.

How to Avoid Student Loan Tax Garnishment

If you want to avoid student loan tax garnishment, here are some options that can help you avoid default or get out of default:

  • Federal consolidation — If you haven’t repaid a federal student loan, you can consolidate all of your federal student loan debt into one direct consolidation loan. After consolidation, you will only have one new loan to repay. You will need to agree to repay the new direct consolidation loan under an income-driven repayment plan, or you can make three consecutive, full monthly payments on the defaulted loan before consolidating it if you wish to be considered in default. With federal student loan consolidation, your interest rate will be a weighted average of the interest rates on your existing loans, so your new rate may or may not be lower.
  • Adjournment or abstention — Either option can give you more time to build your financial footing by allowing you to temporarily defer your federal student loan payments. Unfortunately, interest will continue to accrue in most cases.
  • Loan rehabilitation — A pardon can help get you out of default, but it might not stop wage or tax garnishment until the pardon process is complete.
  • Income Based Reimbursement Plan (IDR) — Enrolling in an IDR plan takes your Income and family size to establish a reasonable monthly payment amount to manage, which can help you avoid payment defaults. You’ll need to recertify your income and monthly payments each year, so it can be difficult to predict what your monthly payments will be for the remaining term of your loan.
  • Federal Student Loan Forgiveness — If you are eligible for federal student loan forgiveness, you may not owe any more money on your loans (some forgiveness programs only forgive partial loan amounts) and you won’t have to worry about a student loan tax offset. If your student loans are already in default, you will need to resolve the default before your loans can be eligible for loan forgiveness.
  • Private student loan refinancing — Switching to a private lender could help you replace your old loan with a new one, ideally with a lower interest rate or smaller monthly payments. Refinancing generally requires good to excellent credit, so it can be difficult to qualify if you have defaulted loans, but applying with a co-signer can help. And think carefully before you refinance federal student loans into a private loan: you’ll lose access to federal protections like deferment, forbearance, and IDR plans.

Credible makes it easy for you compare student loan refinance rates from various lenders, and it will not affect your credit.

When will defaulting on a student loan cause your tax refund to be garnished?

Tax refund garnishment notifications (known as an intent to set off federal payments) are sent 60 days before the garnishment occurs, so you’ll get a warning before the garnishment begins -stop.

This notice should come from the Treasury Clearing Program and will give you several immediate options:

  • Pay the debt.
  • Dispute the debt.
  • Establish a payment plan.
  • Request a debt review.

This notice will also specify the type of debt and the amount owed.

When your tax refund cannot be entered

Here are some examples of when the government may not be able to seize your income tax refund:

  • Your school is closing. If the school for which you took federal student loans closes during your enrollment or shortly after you withdraw, you may be eligible to have your federal student loans forgiven. Once your loans are paid off, you are no longer required to repay your federal student loans and therefore cannot be in default or have your tax refund garnished.
  • You file the balance sheet. Filing for bankruptcy can clear your student loans from default. If you recently filed for bankruptcy or are about to, find out whether or not your federal student loan qualifies for default.
  • You are totally and permanently disabled. Federal student loans can be forgiven – and therefore not in default – if you suffer a total and permanent disability.

What if you think you received a tax offset notice in error?

If you receive a tax offset notice, it’s important to check your student loan status for any errors.

If you think you are up to date on the debt, you can send evidence to support your claim to the Department of Education. If you have fully repaid your debt, you can call the phone number listed on the Notice of Intent to Set Off Federal Payments you received.

If you have ever received student loan tax offset, you can take steps to attempt to receive a refund on your entered return.

If student loan refinancing is right for you, visit Credible for compare private student loan refinance rates from various lenders in minutes.

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